MacroVoices #503 Adam Rozencwajg: Gold, Oil & Uranium

Key Concepts

• Gold Market Dynamics: Gold's unique market structure, driven by above-ground inventory and central bank demand, contrasts with typical commodity markets like oil.
• Monetary Regime Change: Historical parallels suggest that significant shifts in global monetary systems precede major commodity bull markets.
• Oil Market Sentiment: Current bearish sentiment towards oil is compared to gold's "barbarous relic" narrative in 1999, suggesting a potential undervaluation.
• Uranium Supply/Demand Imbalance: Depleted Japanese stockpiles and curtailed mine supply have created a deficit in the uranium market, with limited new supply expected before 2030.
• AI and Energy Demand: The immediate energy demand from the AI boom is expected to be met by natural gas, with nuclear power being a longer-term solution.
• Natural Gas as a Trade: Natural gas, trading near decade lows, presents an asymmetric investment opportunity due to increasing LNG exports, AI-driven electricity demand, and flattening production.
• US Dollar Strength: The US dollar index shows signs of a potential counter-trend rally, with bearish sentiment persisting despite technical indicators suggesting otherwise.
• Treasury Yields: Declining US 10-year Treasury yields are seen as a potential red flag for equity markets, historically preceding market turns.

Gold: A Bull Market in Progress

Adam Rosenwag asserts that despite recent pullbacks, the gold bull market is not over. He differentiates gold from commodities like oil by highlighting its vast above-ground inventory (estimated at 100 years of cover) compared to oil's 40 days. In gold, price is determined by trading within this inventory, not solely by the marginal cost of new production.

Key Drivers for Gold:

• Central Bank Demand: A primary driver is the increased purchasing of gold by central banks, particularly emerging markets like China, India, and Brazil. This trend is fueled by geopolitical concerns, specifically the US freezing Russian Treasury assets following the invasion of Ukraine. Countries are diversifying reserves away from dollar-denominated assets susceptible to US sanctions. This demand is described as "price inelastic," meaning central banks will continue to buy regardless of the price.
• Limited Western Speculative Interest: Unlike past cycles, Western speculative investment in gold has not reached significant levels. This is crucial because speculative investors are momentum-driven and can quickly exit positions, creating supply volatility. The current lack of massive Western accumulation suggests this source of supply is not an immediate threat.
• Price-Sensitive Sellers: The sellers of gold to central banks are primarily Indian retail investors, recycled gold, and mine supply. Mine supply has been declining for seven consecutive years, and both Indian supply and recycled gold are price-sensitive, requiring higher prices to bring more material to market. This creates a dynamic of price-insensitive buyers and price-sensitive sellers, a recipe for a bull market.

Valuation of Gold:

• Relative to Goods: Gold appears expensive when compared to the median US house price or a basket of goods used for GDP deflator calculations.
• Relative to Financial Assets: Conversely, gold is considered cheap when valued against all mined gold relative to global stocks, equities, or debt. Historical ratios like the Dow-to-Gold price, which have reached 1:1 or 2:1 in past cycles, suggest significant upside potential for gold if it were to reach parity with current stock market valuations.

Investment Stance:

Rosenwag's firm is holding its gold investments but may consider rebalancing, potentially trimming some exposure to reallocate to other areas that may offer deeper value. However, he maintains that gold "ultimately has legs to run."

Oil: A Misunderstood Bull Case

Adam Rosenwag argues that crude oil is currently the most "hated" asset class, with energy's weighting in the S&P 500 at historically low levels (around 2.3% compared to a long-term average of 12-14%). He draws a parallel to gold in 1999, when it was considered a "barbarous relic" with no future use, yet went on to become the best-performing asset class.

Challenging the Bearish Narrative:

• IEA Data Discrepancy: The International Energy Agency (IEA) reports a surplus of over 1.5 million barrels per day, suggesting a bearish market. However, physical storage levels are flat, indicating that demand is likely stronger than the IEA estimates. This suggests that the widely held narrative of a persistent surplus is incorrect.
• Historical Parallels: Rosenwag points to historical instances where a rollover in US shale production, the primary source of non-OPEC supply growth for 15 years, has preceded significant bull markets in crude oil. He predicts this rollover will occur by the end of 2025, with October 2024 being a potential turning point for shale and total US production.
• Geological Constraints: The decline in US production is attributed to drilling out the best geological areas, leading to lower-quality wells and an inevitable production rollover. This is a geological problem, not a political one, and cannot be solved by policy pronouncements.

Term Structure and Inventories:

• Backwardation vs. Contango: While the term structure has shifted from backwardation (indicating tight inventories and a premium for prompt delivery) to contango (suggesting ample inventories), Rosenwag argues this reflects the current "balanced to ever so slightly in surplus" market.
• Future Tightness: He anticipates a very tight market by mid-to-late next year, leading to backwardation and higher prices. He believes the market cannot be balanced at current prices.
• The "Widowmaker" Contract: The volatility of natural gas futures, earning it the nickname "widowmaker," is discussed. Patrick Szna suggests a more intelligent way to invest in natural gas is through the 12-month natural gas fund (UNL), which holds a laddered portfolio of contracts, reducing roll decay and volatility compared to the front-month focused UNG.

Investment Stance:

Rosenwag is bullish on oil, believing the market is misunderstood. He sees an asymmetric opportunity due to the current depressed pricing and the impending rollover of US shale production.

Uranium: A Tight Market with Significant Upside

Adam Rosenwag expresses extreme bullishness on uranium, highlighting a fundamental deficit in the market that is expected to worsen.

Market Dynamics:

• Post-Fukushima Stockpile Liquidation: Following the Fukushima disaster, Japan continued to take delivery of contracted uranium despite having no operating reactors, building up significant stockpiles. These stockpiles have now been depleted, removing a key buffer that kept the market balanced despite mine supply falling below reactor demand.
• Primary Deficit: With the Japanese stockpiles gone, the market is now in a primary deficit, meaning mine supply is insufficient to meet reactor demand. This situation is expected to persist until new mines come online, which Rosenwag estimates will not happen before 2030.
• Hedge Fund Activity: In 2023, hedge funds actively participated by buying junior uranium miners and driving up the Spot Physical Uranium Trust (SPUT) to a premium, which allowed them to issue shares and buy more physical uranium. This speculative fever has since unwound, with hedge funds largely exiting the market.
• Limited New Supply: New mine supply is constrained by long permitting processes and community engagement, making it impossible to bring new production online quickly. NextGen Energy is expected to be the first to bring new supply online, but not before 2030.

Potential Price Appreciation:

• "Feed the Beast" Mentality: Once a nuclear reactor is built, the capital expenditure is sunk, and fuel costs become a secondary concern. Reactor operators would be willing to pay significantly higher prices for uranium to keep their facilities running, potentially reaching $500 per pound or more, compared to the current ~$85.
• AI Demand as a Long-Term Factor: While AI data center buildouts will increase electricity demand, Rosenwag believes natural gas will meet this demand in the short to medium term (next 5 years). Nuclear power's contribution to AI demand is a longer-term story, likely from 2030 onwards.

Risks and Potential Top Signals:

• Fukushima-Style Accident: A major nuclear accident remains a sentiment risk that could significantly impact the uranium industry.
• SPUT Liquidation: A potential psychological top signal could be the liquidation of the Spot Physical Uranium Trust (SPUT). While the trust's management is unlikely to sell, a situation of extreme tightness could lead to a bid for the entire trust, potentially by hyperscalers funding consortiums to secure uranium inventory for their AI data centers. This would be a positive outcome for investors but could mark a psychological peak.
• Plutonium Economy and Policy Changes: The US Department of Energy's announcement to make weapons-grade plutonium available for advanced reactor companies is seen as a significant policy shift that could redefine nuclear energy. This move, along with potential reforms to Section 123 of the Atomic Energy Act, could accelerate the development of a "plutonium economy" and breeder reactors, further supporting the long-term bullish case for nuclear fuel.

Investment Stance:

Rosenwag is extremely bullish on uranium, focusing on the commodity itself rather than equities, which he believes may become correlated with AI baskets and experience heightened volatility. He sees significant asymmetry in the uranium commodity.

Natural Gas: The Unsung Hero of the AI Boom

Patrick Szna highlights natural gas as the primary beneficiary of the AI boom in the short to medium term, contrary to the common belief that nuclear power will be the immediate solution.

Key Drivers for Natural Gas:

• AI-Driven Electricity Demand: The massive increase in electricity demand from AI data centers will require a flexible and readily available power source. Natural gas, with its rapid ramp-up capabilities, is positioned to meet this demand.
• LNG Export Capacity: The US is ramping up its liquefied natural gas (LNG) export capacity, creating a structural demand driver for domestic natural gas production.
• Flattening Production: US natural gas production growth is flattening, creating a tightening market dynamic as demand increases.
• Depressed Pricing: Natural gas is trading near decade lows, presenting an asymmetric investment opportunity.

The "Widowmaker" Contract and Investment Strategy:

• Futures Volatility: Trading natural gas futures directly is highly volatile due to extreme seasonality and sensitivity to weather and storage forecasts, earning the front contracts the nickname "widowmaker."
• UNG vs. UNL: The United States Natural Gas Fund (UNG) is structurally flawed as it holds only the front-month contract, leading to negative roll yield and persistent bleed. A better alternative is the 12-month natural gas fund (UNL), which holds a laddered portfolio of the next 12 monthly contracts, smoothing out seasonality and reducing roll decay.
• Investment Approach: Szna suggests a delta-1 long position in UNL, scaling into the position as technical trend-following signals indicate the start of a new bull cycle.

Conclusion:

Natural gas is presented as a cheap asset with improving fundamentals, poised for a significant repricing as demand growth from LNG exports, AI data centers, and industrial reshoring outpaces production growth.

Broader Market Commentary

Equities

Eric Townsend believes the market is driven by headline news and is difficult to predict. He notes that while geopolitical escalations (like potential conflict in Ukraine) can be inflationary and ultimately a tailwind for stocks, short-term panic is possible. He emphasizes that the market has not yet experienced a significant correction, and a 5% pullback is overdue. The upcoming earnings season for "Mag Seven" companies will be a key determinant of market direction. A break below the 6600 level on the S&P 500 could trigger systematic selling.

US Dollar

Patrick Szna observes that the US dollar index has been in a bear market but has stopped declining and is showing signs of a potential counter-trend rally, with a double bottom formation and sustained trading above its 50-day moving average. He notes bearish sentiment persists despite these technical indicators. A break above the 100 level on the Dixie would be a significant development.

Crude Oil (Technical Perspective)

Patrick Szna analyzes crude oil technically, noting a retest of year lows and a double-bottom bounce. While the bounce has not yet broken above the 50-day moving average or a key Fibonacci zone, the $60-$62 level is critical. A sustained move above this level could pivot the chart from bearish to neutral, demonstrating a basing pattern. He agrees with the bullish intermediate to long-term outlook for oil, anticipating higher prices in the coming year.

Gold (Technical Perspective)

Patrick Szna describes gold's recent volatility as a "roller coaster ride," with significant intraday swings. He attributes this to the rapid acceleration of its rise and the potential for a deeper consolidation. While he remains "big picture, very bullish" on gold, he acknowledges that the market may spend time below $4,000 in the fourth quarter. He believes that after consolidation, gold will continue its primary bull phase due to a fundamentally bullish macro backdrop.

Uranium (Equity vs. Commodity)

Patrick Szna expresses concern about uranium equities becoming correlated with AI baskets and potentially experiencing heightened volatility if there's a mean reversion in that space. He is therefore more focused on the uranium commodity itself, believing it offers more asymmetry and is still reasonably priced, particularly through vehicles like the SPUT Physical Uranium Trust.

Copper

Eric Townsend notes that copper is finally catching a bid, and he is long the commodity. He emphasizes the importance of China's policy in copper's future. While further dips are possible due to geopolitical news, he views them as buying opportunities. Technically, copper has held the 50-day moving average and is attempting a breakout, with potential to reach $5.25 to $5.50.

10-Year Treasury Note

Patrick Szna identifies declining US 10-year Treasury yields as a "red flag" for equity markets. Historically, rising bond prices and declining yields often precede market turns. The current demand for bonds suggests this trend warrants close attention for its potential repercussions on other markets.

Goring and Rosenwag's Research

Adam Rosenwag explains that his firm, Goring and Rosenwag, provides institutional-quality research on commodities for free. They are an investment firm managing resource equity markets through US mutual funds and UCITS funds. Their transparency in sharing all research, including past failures, is a key differentiator. Their website, GoRosen.com, serves as a platform for this research.